Abstract
This paper provides a framework of how conditional conservatism contributes to the reduction of creative accounting which in turn affects auditor fees, litigation risk, auditor independence and improved auditing quality. All these factors are reflected in the degree of stakeholders’ confidence in financial reports. The absence of conservatism in the Financial Accounting Standards Board’s (FASB) conceptual framework is due to its belief that conditional conservatism causes a bias in accounting information and that it compromises neutrality. However, by supporting conservatism with a set of controls including upgraded training, intensified effort of auditors, increased professional skills and activated audit committees, users’ financial statement become more reliable which helps users make the right decisions.
Highlights
Giving an accountant a high degree of flexibility in using appropriate accounting principles to preparing financial statements, the exploitation of many inappropriate alternatives and indirect accounting methods to achieve the interests of specific parties would provide misleading financial statements and reports. Gupta (2015) suggested that the subject of creative accounting is usually portrayed in maligned and negative ways
This paper provides a framework of how conditional conservatism contributes to the reduction of creative accounting which in turn affects auditor fees, litigation risk, auditor independence and improved auditing quality
In 2012, conservatism was excluded from the joint conceptual framework proposed by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB), even though it plays an important role in financial reporting (Zhong & Li, 2017)
Summary
Giving an accountant a high degree of flexibility in using appropriate accounting principles to preparing financial statements, the exploitation of many inappropriate alternatives and indirect accounting methods to achieve the interests of specific parties would provide misleading financial statements and reports (creative accounting). Gupta (2015) suggested that the subject of creative accounting is usually portrayed in maligned and negative ways. Granting high fees to the auditor compared with his efforts in order to contribute to the negative side of creative accounting and to conceal fraud and misinformation in the financial report along with increased litigation risk, and threatening the auditor independence generally have serious implications for audit quality. It is possible to obtain trustworthy and credible auditing reports prepared according to conditional conservatism policies with auditor independence that positively affect the users of financial statements decisions. This will decrease auditor fees immensely and improve the quality of auditing reports which in turn will help increase stakeholder’s confidence.
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